The 2025 federal estate and gift tax rate remained as high as 40% for taxable transfers above the applicable exclusion amount. For people who died in 2025, the federal estate tax filing threshold was $13.99 million.
An estate generally must file Form 706 when the gross estate, adjusted taxable gifts, and certain other amounts exceed this threshold. But do you have to pay taxes on an inheritance?
Receiving an inheritance does not automatically create a federal tax obligation for the beneficiary. Despite this fact, there are other taxes that may apply depending on the circumstances. This may include federal estate tax, state inheritance or estate taxes, income tax on certain inherited assets, and tax on gains from a later sale.
Let’s look at what can actually be taxed when you inherit something and the key rules beneficiaries should understand.
Only Five States Still Tax the Person Who Inherits
An inheritance tax falls on the person receiving the money. An estate tax comes out of the estate before anything reaches anyone. Different payers, different bills, and most people use the words interchangeably.
Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania are the ones still running an inheritance tax, according to the Tax Foundation. Iowa repealed its own effective at the start of 2025, which is why older articles still list six. Maryland runs both an inheritance tax and an estate tax, the only state doing so.
The general rule is that domicile controls, but there is a flaw in the nice theory of that rule. Property is taxable according to its status, and a vacation home located in the taxing state will drag some of the assets into the state’s jurisdictional net regardless of the domicile of the decedent or heir.
The Federal Bar Moved, and It Moved Up
For years the planning world braced for the exemption to fall back to roughly $7 million in 2026. This reduction never happened. The One Big Beautiful Bill Act, signed July 4, 2025, set the basic exclusion amount at $15 million per individual for deaths after 2025. It also removed the expiration date entirely, with inflation indexing resuming in 2027.
The rate above the line stayed at 40 percent, and the IRS confirmed the figure in its 2026 inflation adjustments.
Married couples reach $30 million, but not automatically. Portability requires the first estate to file Form 706 and elect it, generally within nine months of death. Families who skip the return because no tax was owed forfeit the unused exemption permanently.
Retirement Accounts Are Where the Real Trap Sits
A surviving spouse who inherits a 401(k) or an IRA has room to maneuver. Leaving the funds where they are, rolling them into an account of their own, moving them to an inherited IRA, or taking a lump sum each carry different tax treatment. An IRS tax attorney can help beneficiaries understand which option may be most appropriate for their circumstances.
Most other beneficiaries land under the SECURE Act ten-year rule, which empties the account by the end of the tenth year after death. Eligible designated beneficiaries sit outside it. That category covers a minor child of the owner, a disabled or chronically ill person, and anyone not more than ten years younger than the owner, all of whom can still stretch distributions across a life expectancy.
Treasury finalized its regulations on July 19, 2024, and beginning with the 2025 distribution year, a beneficiary whose account owner died on or after their required beginning date must take an annual distribution in years one through nine and empty the account in year ten. Waiting until year ten is no longer an option in that situation, and a shortfall carries a 25 percent excise tax.
Real Estate Waits Until You Sell
Inheriting a house triggers nothing on its own. The question only arrives at a sale, and what shows up then is capital gains tax rather than anything to do with inheritance.
The basis resets to what the property was worth on the date of the original owner’s death, which is the step-up in basis. Decades of appreciation under the previous owner disappear from the calculation, and gain runs only from that reset point forward. On a house bought in 1978 and sold two years after an inheritance, that single mechanic is usually the difference between a small bill and an enormous one.
There are other tax complications that inheritance can create. A property located within a state where the family is not living can potentially create filing, property tax, probate, or state estate/inheritance tax issues in that jurisdiction.
An inherited retirement account where the withdrawal plan was overlooked can be taxable as income. Federal rules may require beneficiaries to withdraw funds within particular periods. Rules may vary depending on the type of account and relationship to the deceased, but these need careful attention.
There is a correct answer to all of these, and none of them will improve by delaying the investigation.
